Private Credit News Weekly Issue #92: BCRED Posts First Loss in Three Years, Banks Rethink Leverage Terms
Direct lenders split into believers and realists as redemptions breach caps, European stress surfaces, and asset-backed finance emerges as the exit strategy
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Blackstone’s $83 billion BCRED posted its first monthly loss in more than three years, dropping 0.4% in February. The fund was flat for the first two months of 2026 after an 8% gain in 2025.
The loss reflected wider spreads and unrealized marks including Medallia, marked down to 78 cents. PIMCO president Christian Stracke isn’t buying what’s for sale. “A lot of the loans that are out for sale right now are pretty bad loans,” he said. “They’re not clearing at a price yet where we would be interested.”
PIMCO would need “high-teens” returns to get interested. The firm flagged a multi-year process of churning through weaker loans as capital flows out.
JPMorgan started pulling back from select private credit funds, paring lending amid panic about underwriting standards and software exposure. Other major banks have begun similar discussions. Banks lent at 150 bps above SOFR, down from 275 bps in 2024. Now they’re reconsidering terms.
Morgan Stanley predicts default rates will climb to 8% as AI disruption unfolds. Software represents 26% of BDC portfolios, with 11% of loans due in 2027 and another 20% in 2028. Houlihan Lokey shows 13% of lower-middle-market loans valued below 90% of par, an “alarming” sign.
Meanwhile, Goldman is raising $10 billion for a new direct lending fund. Oak Hill launched a retail interval fund called OFLEX. Some managers are calling this a buying opportunity. Others are walking away.
The market is splitting. BCRED just posted its first loss in three years. Banks that fueled the leverage boom are reconsidering terms. And PIMCO says nothing for sale is worth the price.
Key Market Themes
1. BCRED Posts First Monthly Loss Since 2022, Down 0.4% in February
Blackstone’s $83 billion flagship private credit fund posted its first monthly loss in more than three years, losing 0.4% in February according to its website. The last monthly decline was September 2022. Performance was flat for the first two months of 2026 after an 8% gain in 2025.
Blackstone told investors the February loss reflected wider spreads across public and private markets, as well as unrealized marks on individual names including Medallia. The firm pointed out the fund outperformed the leveraged loan market by around 0.4 percentage points in February and 1 percentage point since the start of the year.
A spokesperson said BCRED continues to deliver strong performance with a 9.5% annualized total return since inception for Class I shares. The fund was set up in January 2021.
Blackstone disclosed in February it had marked down the value of its loan to Medallia, a software company owned by Thoma Bravo, to 78 cents on the dollar. The loan has become a weak spot for private credit lenders, exposing sharp differences in valuations across managers.
The shift matters
BCRED breaking its three-year winning streak signals broader portfolio stress that smooth NAVs have masked. The 0.4% loss is small but the timing matters more than the magnitude. February marked the month software concerns peaked and redemption requests surged across the industry.
Medallia at 78 cents demonstrates how quickly marks can move when sponsors stop supporting refinancings. Other managers holding the same credit at different values creates the valuation arbitrage that undermines NAV credibility.
The fund’s 9.5% annualized return since inception remains strong, but that’s backwards-looking. Forward returns depend on whether February’s loss signals the start of prolonged mark deterioration or just monthly volatility. BCRED is the bellwether. If it’s showing cracks, smaller funds face worse.
2. PIMCO President Says Loans for Sale Are “Pretty Bad” at Current Prices
PIMCO president Christian Stracke is staying away from loans being put up for sale amid private credit tumult because they’re “pretty bad.” As funds offload assets to meet redemptions, the prices being asked are still too high given the risk. PIMCO would need to see “high-teens” returns to get interested in what’s increasingly stressed or distressed territory.
“A lot of the loans that are out for sale right now are pretty bad loans,” Stracke said Wednesday in a Bloomberg TV interview. “We’ve seen some blocks of those. They’re not clearing at a price yet where we would be interested in buying them.”
Stracke said there will be a multi-year process of churning through weaker loans as capital continues flowing out. Firms from Blue Owl to New Mountain have disclosed selling typically illiquid private loans this year. Investors rushed out after high-profile blowups turned the spotlight on what Stracke previously called “a crisis of really bad underwriting.”
Exposure to software borrowers is a particular concern as AI threatens business models. “In an industry that has 20%, 30%, sometimes even more of their loans in software, you have to imagine that some significant part of that is going to get into trouble and there will be losses in that space,” Stracke said.
What this reveals
PIMCO managing $2.3 trillion and publicly calling assets for sale “pretty bad” while demanding high-teens returns creates a bid-ask standoff. Sellers need higher prices to avoid triggering marks. Buyers want discounts that reflect actual risk. The gap prevents price discovery.
The multi-year churning process Stracke describes isn’t a prediction. It’s PIMCO’s deployment timeline. The firm raised $7 billion for asset-backed finance as the alternative while waiting for distressed opportunities to clear at appropriate prices.
When one of the world’s largest credit managers says loans aren’t clearing at prices where they’d buy, that’s not market commentary. That’s PIMCO telling sellers they’re still too optimistic about recovery values and telling the market the bid is 30-40 cents lower than current asks.
3. JPMorgan and Other Banks Reconsider Private Credit Lending Terms
JPMorgan decided to pare lending to select private credit funds as the $1.8 trillion sector wrestles with panic about underwriting standards, outdated valuations, and software exposure. Discussions have begun at other major lenders about funding they’ve provided to private credit firms.
Industry executives said privately that terms including loan-to-value ratios will tighten and some banks may press pause on new leverage lines while determining concentration risk that sparked the retail exodus.
Banks lent enthusiastically to private credit at low rates, often just 150 bps above SOFR, down from 275 bps in 2024. Now they’re considering raising costs when funds return for refinancing. This back leverage can push 8-9% gains into double digits, a milestone that helped draw institutional capital.
JPMorgan negotiated the right to revalue private credit assets at any time based on its own assessment. So far only a small number of borrowers are impacted and its retreat hasn’t triggered material margin calls. Heavy loan markdowns reported by BDCs in recent weeks pointed to declining asset quality banks can’t ignore.
Bank of America is sticking with plans to pump $25 billion into the asset class. Bernard Mensah, who heads strategy internationally, said signs of strain present an opportunity for “a very good, healthy cleanup.” BofA “didn’t rush” into private credit and still feels “very good about” its positioning.
Why the pullback accelerates pressure
Banks provided the leverage that turned 8% yields into 12-13% returns. If JPMorgan tightens terms and others follow, funds face the choice between accepting lower levered returns or finding new lenders at higher costs. Either outcome compresses performance.
The Office of Financial Research estimates private credit fund borrowing could be as high as $345 billion. JPMorgan’s move to revalue assets unilaterally gives the bank control over leverage ratios regardless of manager-reported NAVs. That creates potential forced deleveraging if bank marks diverge from fund marks.
BofA staying committed while JPMorgan pulls back creates bifurcation. Managers with BofA relationships maintain leverage access. Others face tighter terms or reduced capacity. The $25 billion BofA commitment becomes more valuable as JPMorgan capacity shrinks, giving BofA pricing power in future negotiations.
4. Continuation Vehicles Hit Record $225 Billion as Liquidity Escape Hatch
The private capital secondaries market hit $225 billion in 2025 with 86% of survey respondents expecting record volumes in 2026 per Houlihan Lokey’s inaugural Compass survey. Continuation vehicles are dominating conversations as participants question true risks and fair values against base rate volatility, potential stagflation, and war.
For some, continuation vehicles help avoid selling into crashing markets, stay invested in sectors temporarily out of favor, or give companies more time to reach full return potential. Others say the vehicles conceal sins sponsors don’t want to confess, whether poor management performance or outdated valuations that stymied exits.
Just 7% of LP-led secondaries in H2 2025 sold at par or better. Around a third sold at 90% or more of NAV, while more than one in four transactions went under 80%.
GPs are increasingly turning to secondaries to return liquidity to credit investors. Credit represented around 15% of market volume in 2025. A continuation fund allows existing investors to cash out while enabling new investors to put on new leverage, optimizing capital structure for sizeable returns.
Sixth Street warned the $1.8 trillion private credit industry may need years to work through an “intense yet warranted reset” causing redemption waves. “While some may believe today’s volatility is only a minor episode to be weathered, we believe there is going to be an honest reckoning for the sector resulting in a healthier and more resilient direct lending industry.”
The continuation dynamic
Continuation vehicles selling at 70-90 cents on the dollar expose the gap between reported NAVs and what sophisticated buyers will pay. When a third of LP-led secondaries clear below 90% of NAV, that’s not distressed selling. That’s price discovery.
The 15% credit volume in secondaries creates a secondary market for loans that managers claimed were hold-to-maturity. New investors putting on fresh leverage to goose returns demonstrates the model depends on layering debt rather than generating alpha from credit selection.
Sixth Street’s multi-year reset warning matters because the firm manages significant capital and has visibility across the market. Comparing private credit to the non-traded REIT segment, which took years to work through capital flow disruption, suggests this isn’t a one-quarter blip. It’s a structural repricing.
5. Lower-Middle-Market Shows Most Distress at 13% Below 90% of Par
Smaller companies are showing the most strain, with 13% of private credit loans in the lower-middle market valued below 90% of initial value, an “alarming” sign per Houlihan Lokey. Among companies with sub-$20 million in adjusted EBITDA, only 78% of loans are valued within 3% of original price, compared to 88% of all borrowers.
These loans may be struggling now, but the looming wall of maturities in software poses greater risks. Software companies are performing well currently, with nearly 70% achieving revenue growth and EBITDA margin growth year-over-year. Another 75% have loan-to-value ratios below 50%.
But 47% of software loans, and 56% by dollar amount, will mature by 2029 when firms must either repay debt or prove they can refinance in the age of AI. That’s over $160 billion in loans, a massive wall taking up significant proportion of private credit’s entire direct lending book.
For loans maturing sooner, there’s a “race against time” with companies potentially able to refinance before AI drastically changes the industry. Those with longer-dated maturity have more time to prepare but “their entire business model could be fundamentally challenged by more agile, AI-native competitors.”
While 4.3% of loans Houlihan Lokey tracked were in default, that made only 1.4% of total loan value. Many defaults were in smaller companies which, because of size, have lower potential impact on investors.
The distress distribution matters
Lower-middle-market at 13% below 90% of par versus 5% distressed across all borrowers shows risk concentrating in smaller loans. These borrowers lack financial cushion to ride out rate pressure, tariffs, and supply chain disruption.
But focusing on current small-company distress misses the larger threat. Software performing well today with 75% of companies at sub-50% LTV doesn’t mean the $160 billion maturity wall disappears. It means the stress is deferred to 2027-2029 when refinancing comes due.
The race against time framing captures the tension. Companies maturing in 2027 might refinance before AI disruption hits full force. Those maturing in 2028-2029 face both the need to refinance and prove their business model survived AI competition. Lenders can’t price that uncertainty, which explains why some are exiting exposure entirely rather than trying to underwrite through the unknown.
6. Morgan Stanley Sees Private Credit Defaults Climbing to 8% on AI Disruption
Default rates in direct lending will climb to 8% as AI advances continually disrupt software, according to Morgan Stanley. While AI disruption hasn’t impacted private credit fundamentals in a “material way” yet, elevated leverage and looming maturity walls within software may push default rates near peak levels unseen since the pandemic.
“Credit fundamentals of software loans are challenged with the highest leverage and the lowest coverage ratios across major sectors,” strategists including Joyce Jiang wrote. While defaults have moderated across public and private markets, defaults will climb further as AI disruption unfolds.
Software is the largest sector in BDC portfolios at roughly 26%. Private credit CLOs, which securitize middle-market loans, have about 19% of portfolios in software, with many loans coming due soon.
The maturity wall is “front-loaded for software loans in direct lending,” with 11% of such loans due in 2027, followed by another 20% in 2028. Default rates in direct lending last approached 8% in 2020 during COVID, though they recovered quickly and now hover in mid-single digits.
UBS strategists warned last month that private credit could see default rates surge as high as 15% in a worst-case scenario where AI triggers “aggressive” disruption among borrowers. Morgan Stanley strategists argue broader risks in private credit are significant but not systemic, posing limited danger of spillover to wider markets.
The 8% baseline assumption
Morgan Stanley calling for 8% defaults isn’t a bear case. It’s the base case assuming AI disruption continues at current pace. The comparison to 2020’s 8% peak during COVID provides the reference point, but COVID was a temporary shock that reversed. AI disruption is structural and permanent.
Software at 26% of BDC portfolios and 19% of private credit CLOs means if software defaults hit 15-20%, overall portfolio default rates reach 8% even if other sectors perform normally. The math is straightforward but the implications are severe for funds marketed as lower-volatility alternatives to high-yield bonds.
The 11% of software loans maturing in 2027 and 20% in 2028 creates the trigger mechanism. Defaults accelerate not when business models fail but when refinancing becomes impossible because lenders won’t roll maturing debt at any price. Morgan Stanley’s 8% forecast assumes a portion of that $160 billion maturity wall can’t be refinanced.
7. Goldman Raising $10 Billion While Oak Hill Launches Retail Interval Fund
Goldman Sachs Asset Management began preliminary talks to raise at least $10 billion for West Street Loan Partners VI, a global direct lending fund. The fund will focus on companies across North America, Europe, and Australia, typically targeting businesses generating more than $100 million in EBITDA. Its predecessor fund raised over $13 billion in 2024.
Goldman is targeting returns of 10-12% on a levered basis and 6-7% unlevered. At least 80% of the portfolio is expected to consist of senior loan positions.
Oak Hill Advisors is courting retail investors with launch of a new interval fund that will deploy capital across public and private debt. CEO Glenn August said the firm is ready to capitalize on dislocations across credit markets. “We’re not sitting here today and deploying all of our dry powder, but there is an opportunity to buy assets at prices that are more attractive than six months ago.”
The new OFLEX fund will target opportunities across direct lending, asset-backed finance, CLOs, public credit, and special situations. The non-publicly traded vehicle will allow investors to buy in daily and offer quarterly redemptions of at least 5% of net assets.
August sees the launch as opportunity to offer retail buyers access to a strategy available only to institutional buyers such as public pension funds for over 30 years. “We’re deep believers that individual investors should have access to alternative investments.”
Oak Hill’s own non-traded BDC, OCREDIT, saw repurchases well below the 5% limit in its most recent quarter per a person familiar. August said institutional investors are already looking to scoop up assets but individual buyers may take more time to dip back into the market.
The divergence signal
Goldman raising $10 billion while retail redemptions surge demonstrates institutional appetite remains strong even as individuals exit. The 10-12% levered return target matches current market pricing, not distressed pricing, suggesting Goldman sees current entry points as fair value not bargain hunting.
Oak Hill launching a retail interval fund during peak redemption pressure looks either brave or foolish depending on execution. August framing this as bringing institutional strategies to retail echoes the pitch that built the BDC boom, but launching amid the shakeout tests whether retail appetite exists at any price.
The 5% quarterly redemption limit August defends as “what the product was designed for” will determine OFLEX’s success. If the fund faces 10-15% redemption requests like peers, enforcing the 5% cap protects the portfolio but leaves investors trapped. That’s the liquidity mismatch retail is learning to fear.
Deals of Note
Paratek-Radius merger - Blackstone leading $1.3B financing; Sixth Street contributed over $400M, joined by Oaktree and Silver Point
GeneDx - Blackstone Credit & Insurance and Blackstone Life Sciences jointly led $100M facility for genomic testing company
Taiwan wind farm - Deutsche Bank underwrote $625M loan, part syndicated to private credit funds and banks
Women’s soccer team - Peyton Manning-backed franchise raised $40M through private bond sale
The Reality Check
BCRED posting its first loss in three years isn’t the headline. The headline is what happens if February’s 0.4% drop becomes March’s 0.6% and April’s 0.8%. Smooth NAVs only work when marks move in one direction.
PIMCO calling loans for sale “pretty bad” while demanding high-teens returns creates the standoff. Sellers can’t accept prices that trigger portfolio-wide revaluations. Buyers won’t pay prices that ignore actual recovery risk.
JPMorgan pulling back eliminates the leverage that turned 8% yields into 12% returns. Banks lent at 150 bps over SOFR because they believed NAVs were real. Now they’re renegotiating because they don’t.
Continuation vehicles selling at 70-90 cents expose what sophisticated buyers actually pay versus what NAVs report. When a third of LP-led secondaries clear below 90% of NAV, that’s not distressed selling. That’s the market telling managers their marks are 10-30 points too high.
Morgan Stanley’s 8% default forecast assumes AI disruption continues at current pace. The $160 billion software maturity wall hitting 2027-2029 doesn’t need aggressive disruption to cause problems. It just needs lenders unwilling to refinance because the business model uncertainty is ununderwritable.
Goldman raising $10 billion shows institutional capital still deploys. Oak Hill launching OFLEX shows some managers still chase retail. But BCRED’s first loss signals the inflection. PIMCO’s “pretty bad” pricing sets the new clearing level. JPMorgan’s pullback removes the leverage. And continuation vehicles at 70-90 cents show what the assets are actually worth when someone has to sell.
